Friday, July 28, 2006

Forward to a Gold Standard?

Is there a case for returning to a gold standard – paper money exchangeable for gold?
Well, it is an age-old debate among monetary economists and one most economists avoid (often smiling indulgently of those minded to ask about it).

Llewellyn H. Rockwell, Jr, in, writes ‘The Case for the Barbarous Relic’ (as Keynes called it). Some extracts follow that caught my eye:

The greatest mystery in the history of economic theory, and still the most unresolved controversy in the economics profession, is the nature and source of the business cycle. Why do recessions occur and why do booms occur? Why do they tend to follow each other with some degree of regularity?

Solving the mystery of the business cycle is a different task than confronted Adam Smith and the classical economists. They sought to answer the question of how economies grow. They concluded that free exchange and capital accumulation are the sources. But the mystery of the business deals with a far more complex problem of why growth seems to occur intermittently. This is a question that only began to absorb economists in the middle of the last century.

Part of the reason is that business cycles simply didn't exist in the prior centuries. We get a clue to the ultimate resolution of this problem by noting that central banks didn't exist before business cycles began to be noticed. But it took economists a very long time before they put two and two together to understand that it is the activities of the central bank itself that brings about the trade cycle.”

Smith was concerned with growth – in fact, his most famous book is a report of his inquiry into the nature and causes of the wealth (the annual produce) of nations. He saw the main economic problem facing Britain in the mid-18th century as how to arrange the nation’s affairs in the manner most likely to progress the spread of opulence.

The poor and the very poor were in dire straits and the growth in per capita income, while positive, was slower that it needed to be. He analysed the workings of the economy in the context of its political management and found that many policies, institutional practices and personal ambitions of legislators and landlords (Britain was an agricultural economy, about 50-50 in the distribution of population) inhibited growth.

Smith’s history of money followed the same lines of other authors (Steuart, Cantillon, Turgot, for example) and he did not find anything remarkable about the evolution of gold and silver into currency. The Bank of England was a private outsourced bank at first, run to manage government debt. Britain’s armed forces (army and navy) were massive institutions – the Royal Navy employed 200,000 men at the turn of the century – and personnel were major costs. So were the bribes and subsidies paid to foreign rulers to keep them ‘on side’ during the European wars.

It was later that the central banks emerged as state-managed institutions with a monopoly of the creation or money. And it is from this perspective that Rockwell writes his trenchant piece. For a quick overview of the gold case, search for

[Llewellyn H. Rockwell, Jr. [
send him mail] is president of the Ludwig von Mises Institute in Auburn, Alabama, editor of, and author of Speaking of Liberty.]


Post a Comment

<< Home